Sterling extends its fall as Brexit worries mount

LONDON - 18 July 2018: Sterling fell in early European trading on Wednesday as worries about British Prime Minister Theresa May’s ability to push through her Brexit plans and a rallying dollar further hit the pound.

May survived a crucial parliamentary vote on part of her Brexit proposals on Tuesday, but the vote was the latest in which May’s authority has been challenged and deep divisions within her own government laid bare.

According to the Times, May threatened rebel lawmakers in her Conservative Party with a general election this summer if they defeated her Brexit plans on customs.

She also saw off an attempt by pro-European Union rebel members of her own party to keep Britain inside a customs union. Markets and many investors want to see Britain retain close trade ties with the EU, possibly through a customs union, after Britain leaves the bloc in March 2019.

The political turmoil caused the pound to suffer its biggest one-day fall in more than two months. A dollar rally following bullish comments from Federal Reserve Chairman Jerome Powell also hurt sterling.

On Wednesday, the British currency dropped 0.3 percent to as low as $1.3080, just shy of the $1.3068 it reached on Tuesday and the 2018 low of $1.3050. The fall comes before UK inflation data due at 0830 GMT that might stem the pound’s losses.

Against the euro, sterling rose slightly to 88.88 pence, reversing some of Tuesday’s losses.

“It is becoming more obvious by the day that May is finding it increasingly difficult to gain a majority in Parliament for `her’ Brexit plan,” Commerzbank analysts said in a note.

“If she makes concessions for the demands of the Brexit hardliners she loses the support of those in favour of a soft Brexit. Pound traders react nervously to these developments.”

Sterling tumbled two cents in the space of hours on Wednesday before the parliamentary vote.

Parliament voted 307 to 301 against an amendment to trade legislation that would have required the government to try to negotiate a customs union arrangement with the EU if, by Jan. 21, 2019, it had failed to negotiate a frictionless free trade deal with the bloc.

British inflation for June is forecast to come in at 2.6 percent, according to a Reuters poll of analysts, against 2.4 percent in May. A stronger-than-expected reading would raise expectations the Bank of England will raise interest rates next month, helping the pound.